Europe & Its Economy: Tough Years Ahead

If you based the prospects for Europe on the euro, you can see by the chart of the euro that optimism has improved since hitting a low in March 2010. However, the current debt crisis has killed the rally, as the euro has broken below its upward trendline.

The 17 members of the eurozone are scrambling to save Greece by expanding its eurozone rescue fund. So far, 16 of the 17 members have approved the revised plan, leaving only Slovakia as yet to approve the change. But this “no” vote doesn’t appear to be an issue, as expectations are that Slovakia will come to the table and agree before the European Union Leaders summit on October 23. The eurozone’s two biggest members, Germany and France, have said they are committed to resolving the debt crisis in Europe.

And to try to safeguard the fragile European banking system, there is talk that banks in Europe should be forced to temporarily increase their capital reserves just in case the region’s debt crisis worsens. European banks should not be allowed to pay out dividends or bonuses until the capital reserves are upped, said José Manuel Barroso, the president of the European Commission. The fear is that a deepened debt crisis could batter the European banking system similar to what happened in the United States, which would not be good.

Barroso is also asking for the launch of a permanent bailout fund—the European Stability Mechanism—to begin in mid-2012. The plan is that private investors in government bonds should absorb any losses when the country needs to write off some of its debt. I’m just not sure how this would work, but clearly the yields offered would need to be big enough to compensate for the added debt risk taken.

I continue to feel that Europe is in deep trouble, which could take years to dig itself out of. Greece is in deep despair and the situation there could easily worsen.

The reality is that growth in both Germany and France has suffered with the focus squarely on saving the PIGS (Portugal, Ireland, Greece, and Spain).

My global economic analysis is that the debt, deficit, and stalling growth issues cannot continue much longer or Europe will falter and fall into a deeper or new recession. Greece remains in a deep recession. The PIGS are also struggling to survive and turn around.

The European Central Bank (ECB) has maintained its benchmark lending rates at 1.50, but also cut its gross domestic product (GDP) growth forecast for the region.

Morgan Stanley cut its global GDP forecast for 2011 and 2012 and added that the eurozone was “dangerously close to a recession.”

So now we wait for Europe to sort out its mess and this will take a long time. The problem is that the fragile European situation also impacts America, which is in its own big mess.

It's the safest—but, until now, completely ignored—place for your money. Because these elite "bank accounts" pay guaranteed 5% cash payments per annum on top of returns on capital exceeding 44%... Learn all about them here.

George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »

2015 Stock Market Outlookby Michael Lombardi

Forecasts Mar. 31, 2015

Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the metal.

Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., our concern is slower world economic growth will negatively impact revenue and earnings growth of American companies, pushing equity prices lower.

Resources

Categories

Follow Us

Dear Reader: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and analysis. We are 100% independent in that we are not affiliated with any bank or brokerage house. Information contained herein, while believed to be correct, is not guaranteed as accurate. Warning: Investing often involves high risks and you can lose a lot of money. Please do not invest with money you cannot afford to lose. The opinions in this content are just that, opinions of the authors. We are a publishing company and the opinions, comments, stories, reports, advertisements and articles we publish are for informational and educational purposes only; nothing herein should be considered personalized investment advice. Before you make any investment, check with your investment professional (advisor). We urge our readers to review the financial statements and prospectus of any company they are interested in. We are not responsible for any damages or losses arising from the use of any information herein. Past performance is not a guarantee of future results.